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Some investors think the only way to protect against losses in commercial real estate investing is to give up returns by investing in private real estate funds following a core (conservative) strategy. The truth is just the opposite: core funds often lose money for years at a time. Over the 36-plus-year history of the NCREIF Open-End Diversified Core Equity (ODCE) Index, there have been 128 complete five-year periods, and the average net return on core funds has been negative during 30 of them (23.8%). And even when positive periods are included, net total returns on core funds have averaged just 7.5% per year.
Over the same period, net total returns on listed U.S. equity REIT portfolios have averaged about 12.2% per year, and net returns have been negative during just 7 five-year periods (5.5%).
But portfolios that combined equal allocations to both listed U.S. equity REITs and private core funds would have shown negative net returns during only three five-year periods, all of them including the 2008-2009 liquidity crisis. Combining listed and private core real estate has tended to protect real estate portfolios from losses.